- Jerome Powell cut interest rates by 0.25% and downplayed fears of an AI bubble. Investors reacted with sophistication: Meta and Microsoft sold off sharply overnight, but Google rose 7%. Bitcoin dropped to $110,000.
U.S. Federal Reserve Chair Jerome Powell divided the stock market yesterday with his remarks, delivering a 0.25% rate cut as anticipated, but then surprisingly stating he did not believe that the AI sector was in a bubble, reminiscent of the dotcom boom in 2000.
TL;DR
- Jerome Powell cut interest rates by 0.25% and downplayed AI bubble fears.
- Meta and Microsoft stocks declined despite Powell's positive AI investment signals.
- Google stock rose 7% despite significant ongoing investments in AI.
- Nvidia's market valuation exceeded $5 trillion, surpassing G7 GDPs excluding US and Japan.
The S&P 500's broad index for large-cap firms finished unchanged, while the tech-focused Nasdaq 100 saw a gain of 0.55%. Nvidia spearheaded the advance in tech stocks, climbing 3% and reaching a market valuation exceeding $5 trillion. (However, its stock has dropped 0.7% in premarket trading today, indicating some investors are cashing in on overnight profits.) For context, Nvidia's market capitalization surpasses the GDP of all G7 nations, excluding the U.S. And Japan.
Powell’s remarks about AI were extensive—he was asked about it repeatedly in a Q&A session with reporters. At every turn, he insisted that the Fed was unbothered by the run-up in valuations of AI companies and the massive amount of capital expenditures they have triggered.
“I don’t think that the spending that happens to build data centers all over the country is especially interest-sensitive. It’s based on longer-run … assessments that this is an area where there’s going to be a lot of investment and that it’s going to drive higher productivity and that sort of thing,” he said.
“These companies—the companies that are so highly valued—actually have earnings and stuff like that. So if you go back to the ’90s and the dotcom, they were—these were ideas rather than companies … So there’s a clear bubble there. Whereas the—you know, I won’t go into particular names, but they actually have earnings, and, you know, it looks like they have business models and profits and that kind of thing. So it’s really a different thing,” he added.
Powell essentially signaled to the tech industry that continued investment in AI is acceptable, as he indicated that interest rate hikes aren't necessary to curb any irrational exuberance.
Following the release of earnings reports from Meta, Microsoft, and Alphabet, investors adopted a more cautious stance. Meta's stock has seen a premarket decline of 8.6% subsequent to closing unchanged yesterday, partly attributed to investor dissatisfaction with the company's investments in AI.
It was a similar story at Microsoft, which is down 2.64% premarket after closing flat yesterday.
Alphabet (Google) stock has climbed 7% in premarket trading, despite the company's ongoing substantial investments in AI.
“Microsoft, Meta, and Alphabet send contrasting signals on the payoffs from the AI investment boom. The three tech giants saw their joint capex bill rise +89% y/y to $78bn in the latest quarter. But with Meta delivering in line revenue guidance for the current quarter ($56-59bn vs $57.4bn est.) And Microsoft saying that capacity was still constraining growth in its cloud unit (+39% y/y vs +37% est.), this left questions hanging over increasingly lofty expectations,” Jim Reid et al. At Deutsche Bank told clients this morning.
“There has simply never been a company like it in the history of financial markets. With Microsoft (-0.10%) also surpassing $4tn earlier this week, and Apple (+0.26%) doing so yesterday, these companies are now more akin to countries than corporations,” Reid said.
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures were down 0.2% this morning. The last session closed flat at 6,890.
- The STOXX Europe 600 was down 0.44% in early trading.
- The U.K.’s FTSE 100 was down 0.4% in early trading.
- Japan’s Nikkei 225 was flat.
- China’s CSI 300 was down 0.8%.
- The South Korea KOSPI was up 0.14%.
- India’s NIFTY 50 was down 0.68%.
- Bitcoin was down to $110K.